Swan faces up to the inevitable

There are some pledges politicians don’t want to break, and it cost federal Treasurer
Wayne Swan
and his colleagues a lot to concede they weren’t going to meet their 2010 commitment to return the budget to surplus this financial year.

For a long time they seemed poised on the precipice, unwilling to move, anticipating an inevitable political pasting over a broken promise. But this is a promise that common sense – and almost any economist and businessman you care to meet – says was right to break.

A stubborn pursuit of a surplus via spending cuts that might have an impact on a softening economy, to offset revenue shortfalls caused by a softening economy, just didn’t seem to make much sense any more.

And the mid-year budget review was really the last opportunity to take action. What options would have been open? Raising excises? Trying to get them through Parliament next year? It was never going to work.

Swan said on Thursday that if the worst people could say of the government was that it got the economy right but fell short on the politics, “so be it".

The Treasurer was unable to say what the bottom-line figure will eventually turn out to be.

The latest monthly data released earlier in the day shows revenue already running almost $4 billion behind budget estimates, meaning a deficit of at least $2 billion.

Treasury advice seems to be that the hole will get bigger with the softness in nominal income. Market forecasts have put the likely deficit at $7 billion. It almost doesn’t matter.

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Swan says the “automatic stabilisers" will be allowed to work on the revenue side of the budget. That is, the decline in revenue that has robbed the government of its surplus commitment, and Treasury coffers of around $20 billion this financial year, will not be offset with more spending cuts.

But the government will keep its fiscal rules in place, which means it will keep the spending side of the budget restrained.

The Treasurer emphasised that abandoning the surplus forecast did not mean the government would let spending rip.

The government’s commitment to hold real growth in spending to 2 per cent a year on average will now be the guiding one for how Labor proceeds and where it tries to take the political debate on the budget.

Labor insists that its big spending promises on disability and education reform will be financed by offsetting big cuts that reflect its Labor values.

Its interest is in demonstrating its spending restraint, and a major spending switch and in pressuring the Coalition to say how it will show spending restraint and fund its commitments.

Tony Abbott
and
Joe Hockey
were less than persuasive in their response on Thursday.

Longer term, the government may consider whether it should change the way it reports the budget and lock itself back into a structural budget framework.